Linens 'n Things files for bankruptcy protection

NEW YORK -- A Chapter 11 bankruptcy filing by Linens 'n Things is the latest sign that the retail sector is becoming leaner and meaner amid a difficult consumer environment.

On Friday, the bedding- and home-furnishing retailer filed a petition in bankruptcy court in Delaware and said it would close 120 underperforming stores, almost a quarter of them in California.

Ken Perkins, president of research company RetailMetrics, said the bankruptcy stems from a combination of operating issues and the lagging economy.

"There's clearly a shakeout going on in the retail industry which will continue through the rest of the year," he said. "I think the weaker players are going to be in difficult shape here."

Consumers are likely to lose out. Brian Riley, senior analyst at research firm The TowerGroup, estimates the filing will freeze about $42 million in consumer gift cards, affecting about 400,000 customers. Gift cards become valueless when a company files for bankruptcy protection.

The company said economic factors such as the decline in the housing market, tightening credit markets and a downturn in consumer discretionary spending, particularly in the housewares and home furnishings sector, led to a "precipitous decline" in profitability and liquidity.

The factors worsened in the first quarter of 2008, the company said.

Linens 'n Things named Michael Gries of the restructuring firm Conway Del Genio Gries as chief restructuring officer and interim chief executive. Current CEO Robert DiNicola will become executive chairman. The company's Canadian stores — which Linens 'n Things said are among the best performing stores — are not included in the filing.

"The number of stores Linens 'n Things is closing is equivalent to almost 15% of Bed Bath & Beyond's core store base, so there is significant opportunity to gain market share," said William Blair & Co. analyst John C. Murphy.